Investors have been giving real estate investment trusts a second look ahead of indexing sector reclassification, bolstering demand for REITs-related exchange traded funds.
“Demand for US real estate securities accelerated in May, as exchanged traded funds focused on the investment segment gathered $1.31 billion of new money, up from $510.4 million in April,” Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, wrote in a note. “The popularity of REIT ETFs persisted last month even as health care and information technology ETF had net client withdrawals.”
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The sudden spike in interest for REIT ETFs may be due to the pending GICS sector elevation of REITs as the REITs category remains underweighted in many actively managed mutual funds.
REITs may continue to experience a short-term boost in the months ahead as the S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector. The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016.
[related_stories]The classification changes will impact the way investors conduct sector investing. An additional $100 billion or more could flow into the newly formed REIT sector as fund managers re-allocate assets in response to their sector investment guidelines. Passively managed securities that provide exposure to REITs have so far added $3.5 billion in net inflows for the first five months, Rosenbluth said.
Investors interested in gaining exposure to the broad REITs sector have a number of broad options available. For instance, the Vanguard REIT ETF (NYSEArca: VNQ), SPDR Dow Jones REIT ETF (NYSEArca: RWR) and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) are among the most popular REIT ETF plays.
The iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) and the VanEck Vectors Mortgage REIT Income ETF (NYSEArca: MORT) have also been popular niche plays on mortgage real estate investment trusts, or mREITs, as this segment of the market typically generates much more attractive yields. S&P Global Market Intelligence equity analyst Erik Oja argued that government agency mortgage backed securities are more appealing if the U.S. economic recovery moderates and global political stability increases, which could keep pressure on long-term U.S. interest rates.
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However, potential investors should be aware that mREITs are also exposed to greater rate-risks and would underperform in a rising interest rate environment.
For more information on real estate investment trusts, visit our REITs category.